Cohen-Esrey Real Estate Services, Inc. v. Twin City Fire Insurance
2011 U.S. App. LEXIS 3793
10th Cir.2011Background
- Cohen-Esrey managed Quail Ridge Apartments in Kansas for HJS Realty, with Phillips as on-site manager responsible for HUD filings.
- From 2004–2006 Phillips conducted a fraudulent embezzlement scheme by moving qualified tenants into vacated units and placing unqualified tenants, falsifying HUD forms and misappropriating funds.
- The fraud was detected in September 2006; Cohen-Esrey notified Hartford (crime policy) and Nutmeg (E&O policy) in late September and October 2006 respectively.
- Twin City issued an E&O policy replacing Nutmeg on November 1, 2006, but Cohen-Esrey did not notify Twin City of the fraud until after inception.
- Cohen-Esrey later sought indemnification under Twin City’s E&O policy; Twin City denied coverage on the policy’s conditioned upon prior knowledge provision.
- The district court granted summary judgment for Twin City, holding Cohen-Esrey had knowledge of a wrongful act or circumstances that could foreseeably give rise to a claim as of inception.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the prior-knowledge condition bars coverage | Cohen-Esrey contends more facts should be considered under the subjective prong. | Twin City argues knowledge of fraud and prior misconduct by Phillips at inception forewarns a claim. | Prior-knowledge condition barred coverage. |
| Application of the Kansas two-prong test (subjective and objective) for foreseeability | Cohen-Esrey asserts additional facts negate foreseeability of a claim. | Twin City asserts known facts by inception could reasonably foresee a claim. | Court adopts Kansas Cahow framework; facts show a claim could be foreseen. |
Key Cases Cited
- Am. Special Risk Mgmt. Corp. v. Cahow, 286 Kan. 1134 (Kan. 2008) (two-prong subjective-objective test for prior-knowledge provisions)
- Coregis Ins. Co. v. Baratta & Fenerty, Ltd., 264 F.3d 302 (3d Cir. 2001) (prior-knowledge exclusion can bar coverage even without certain liability)
- Executive Risk Indem. Inc. v. Pepper Hamilton LLP, 13 N.Y.3d 313 (N.Y. 2009) (prior-knowledge exclusion does not require actual wrongdoing)
- Westport Ins. Corp. v. Goldberger & Dubin, P.C., 255 Fed.Appx. 593 (2d Cir. 2007) (unpublished; consumer foreseeability supports exclusion)